Adani Ports rides on acquisitions to withstand covid-induced downturn

Adani Ports and Special Economic Zone Ltd recouped a large part of its post covid-19 losses and is now only 5% lower than its pre-covid highs.

While the company’s June quarter results were weak, there have been signs of a recovery, with a 6% growth in volumes in July. In comparison, total cargo volumes at major ports (for all commodities) declined 13% in July.

The rise in Adani’s volumes and market share gains has got analysts to revise their volume estimates. “We have revised our FY21E-22 volume estimates higher to account for the same,” analysts at Jefferies India Pvt. Ltd said in a note.

The company said it expects to complete the acquisition of Krishnapatnam Port Co. in the current quarter (Q2FY21) and Dighi Port by the end of this year.

Behind the acquisitions is Adani Ports’ strategy of gaining foothold in established trade routes and attracting cargo volumes through efficient and value-added services. Analysts expect the firm to replicate the strategy with the latest acquisitions as well.

The Dhamra and Kattupalli ports in the east coast are a case in point. Business volumes at Dhamra gained traction after Adani Ports enhanced port-handling capabilities and addressed evacuation issues.

Kattupalli port benefited from market share gains from the Chennai port region, points out Nomura Research. “Adani Ports has a track record of gaining market share by establishing ports within an established ecosystem. The same was witnessed with Mundra, which has gained on west coast, Dhamra in the east coast and Kattupalli in the Chennai cluster. We believe that Dighi will aid in gaining market share from JNPT until JNPT is able to establish a deepwater port at Wadhawan,” analysts at Nomura Research said in a note. JNPT is Jawaharlal Nehru Port Trust, the largest container port in India.

Growing cargo volumes in east coast ports at the industry level are helping Adani Ports’ growth in the region.

“Management is optimistic on Dhamra and Kattupalli seeing strong growth within ports. Interestingly, east coast has accounted for 38% of incremental volumes in the last 3 years and ended FY20 at 20% of overall,” added analysts at Jefferies.

The reduction in inter-corporate loans and the management’s focus on cash flows reassured investors. Acquisitions will push up leverage in the current fiscal. But incremental earnings are expected to soften the net debt to earnings before interest, taxes, depreciation and amortization (Ebitda) ratio. While all these add to investor optimism, any unrelated acquisition or large investments outside the current business can halt the momentum.